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Higher Wages For Fast Food Workers Could Benefit Shareholders

On the face of things, the goals of fast food workers seeking higher pay and those of fast food shareholders seeking the highest investment returns seem permanently at odds, with the increased fortunes of one coming directly out of the pockets of the other.

Starbucks and Chipotle are famous for jobs that pay real career wages, rather than the welfare-eligible pay most fast food workers earn. Starbucks CEO Howard Schultz is a fan of raising the minimum wage, an issue that’s heated up nationally recently with strikes and protests by fast food workers. Starbucks already starts out workers at about $11.50 an hour, well above the $7.25 an hour wage required by federal law.

Chipotle is renowned for quickly moving workers from starting pay levels into higher paying management jobs. Starting pay for “crew,” the people who make the burritos, averages about $10.50 an hour ($21,000 a year) with benefits, according to some reports; $8.50 an hour by others. The company says 98% of its managers, some of whom earn six-digits, start as crew. It’s not unheard of to find a 20-something who was on the line five years ago to be working as a Chipotle “restaurateur,” a position with an average annual pay of about $99,000.

Most fast food restaurants start pay at whatever the minimum wage required by law. A study out of UC Berkeley’s Labor Center last month estimated that more than half of fast food workers collect public assistance, at a cost of about $7 billion a year to states and the federal government. That hive of workers at the counter averages about $9 an hour, while supervisors in fast food average about $13 an hour, according to the National Employment Law Project. Do the math and you get an average $26,000 annual pay as a supervisor. Chipotle pay it’s not.

For shareholders in companies with an abundance of near minimum wage earners, there’s been no obvious gain for the stinginess. The chart below shows share performance for some of these companies—McDonald’s (MCD), Burger King WorldwideBurger King Worldwide and YUM Brands (YUM), owner of KFC and Pizza Hut—against Starbucks and Chipotle.

Of course, wage policies alone didn’t create those investment return disparities. But it’s hard to look at those lines and surmise that Starbucks’ and Chipotles’ more generous policies hurt shareholders.

Higher wages tend to reduce employee turnover, which is a big cost for employers. The Center for American Progress estimates that the cost of turnover in a position earning less than $30,000 a year represents about 16% of the annual salary. While conservatives might quibble with the actual numbers from that left-leaning group, few who have ever had to train or recruit a cashier would deny that it’s a time-sucking, business-slowing process.

There’s also the prospect of attracting better workers with higher wages, which could boost per-worker productivity, improve the service atmosphere for customers and generally make fast outlets seem less bleak.

Higher wages may partly account for the cheerier and more efficient staff at Costco (COST), for instance, when compared to Wal-Mart (WMT), a famously cheap employer.

So why doesn’t McDonald’s and the like embrace some increase in wages? We hear much from the fast food industry about slim profit margins making it impossible for them to afford larger paychecks. Reported profit margins aren’t much help in understanding the situation. Chipotle’s gross profit margin is narrower than McDonald’s, Burger King’s or YUM’s. Operating margins at Burger King are twice what they are at Chipotle and Starbucks.

But the reported margin disparities have everything to do with business model. Starbucks and Chipotle largely own their stores; McDonald'sMcDonald's, Burger King and YUM make money off of fees their franchisees pay them. Technically, it would be the responsibility of franchisees, not the corporation and its shareholders, to set wages. As an investor, best to unleash a full set of financial advisor tools on any company, regardless of wage policy.

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Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She can be reached at editor@ycharts.com. You can also request a demonstration of YCharts Platinum.

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